Just when we thought the drama over bank regulation was dying down, JPMorgan Chase announced massive trading losses of at least $3 billion, once more reminding us that even the most well managed banks take risks, make mistakes, and get burned.

JPMorgan’s infamous “London Whale” trade has brought the Dodd-Frank Wall Street Reform and Consumer Protection Act back under scrutiny, particularly a specific provision called the Volcker Rule. The rule, named after former Federal Reserve chairman Paul Volcker, intends to prevent banks from engaging in risky (or “speculative”) investments that do not benefit customers. It proposes to prohibit federally insured banks from:

Engaging in proprietary trading (taking risky positions in stocks, bonds, currencies, commodities, or derivatives with the firm’s own funds, with the intention of turning a profit)

Owning or partnering with hedge funds that engage in proprietary trading (essentially, prop trading through an affiliate)

The problem with the current draft of the Volcker Rule, however, is that it contains some exemptions—the result of banks’ lobbying after the Dodd-Frank financial-reform act became law in July 2010. According to Time, between July 2010 and October 2011, when the first proposed regulations were published, federal regulators met with JPMorgan 27 times to discuss the details of the legislation.

The current Volcker Rule allows banks to hedge against losses and includes some leniency in how banks label their activities—two loopholes that could have allowed JPMorgan to engage in speculative activities that led to its major loss. Since the Volcker Rule allows banks to hedge against risk, JPMorgan may have engaged in speculation but called it hedging.

JPMorgan’s side of the story

Since JPMorgan’s losses have come to light, it is still up for debate whether JPMorgan’s proprietary trading activities complied with current legislation.

Jamie Dimon, JPMorgan’s chairman and CEO, argued that while the losses were “self-inflicted,” they may not have violated the Volcker Rule’s restrictions and do not necessarily imply that the rule’s exemptions should be revised. He insisted that the trades were meant for the firm’s hedging.

Will the whale change the Volcker Rule?

The ruling on whether the trades violated the Volcker Rule will not be issued until the summer at the earliest. In the meantime, supporters of financial reform have used JPMorgan’s trading fail as evidence of the Volcker Rule’s loopholes and vague definitions.

“JPMorgan’s loss is a stark warning about the dangers of having major banks take these risky bets,” said Senator Carl Levin, one of the politicians who drafted the Volcker Rule. “This is not a hedge as we defined it in the law.”

In February, Levin co-authored a letter to regulators warning that “banks could easily use portfolio-based hedging to mask proprietary trading.” Levin used JPMorgan’s trading loss to argue that the Volcker Rule’s loopholes should be closed before finalizing the regulations in July.

So, while it’s too soon to say whether JPMorgan violated the Volcker Rule, their trading loss suggests a need for further reform to safeguard against such loss and to prevent wily banks from labeling risky betting as “hedging.” As consumer advocate Elizabeth Warren and Senator Levin suggest, we should close the loophole that makes the Volcker Rule toothless.

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